Wednesday, January 23, 2008

On Structural Unemployment and Fair Trade Coffee

Okay, so there's a glut of coffee, and it stands to reason that situation isn't temporary. Coffee growers are too productive and they've made more coffee than the world has use for. As in any case of structural un- or under-employment, the obvious long-term solution would be for a substantial portion of coffee growers to get jobs doing something else. The United States once had its vast majority employed in farming, but now fewer than 1 in 20 US citizens is involved in agriculture. The same progression from field to factory to office has taken place in Europe and is taking place in China and India right now. In the long run, there isn't much future in coffee farming.Fair enough, but "in the long run," Keynes reminds us, "we're all dead." What to do about the coffee over-production now? Let's explore our options:

Nothing. Let the farmers respond to market incentives on their own and switch to more profitable sectors. Which sectors? In Latin America, narcotics and cattle come to mind. The former is profitable but a country dipping its fingers too deep into the narcotics trade risks getting the kind of US "support" that no nation wants. The latter is less profitable, more legal, and probably worse for the environment. Plus, cattle ranching and coffee farming are pretty distinct skill-sets. Ultimately, we'd hope that coffee-glutted countries could focus resources on education and industrial development, providing the training and job opportunities necessary to employ a workforce at a higher rate of productivity. Chavez demonstrates that we ought to know better than that: growers and their economic planners will eschew the "long run" and opt instead for a short run... to the Left.

Make the purchasers pay more. This is the kind of outside-the-box thinking that might earn you a Green Party nomination. Well, pay more to whom? The problem is that there's too much coffee, somewhere, someone is making coffee that the market doesn't need. Do we pass a law requiring Starbucks to buy the remaining world surplus and let it rot? That spirals out of control - artificially propping the price will either raise supply, reduce demand, or both. If demand (and Starbucks's margins) are resilient enough in face of the higher prices, the producers will supply MORE, leaving us worse off than before. In the end, consumers are paying more for their coffee, Starbucks is making less money. Worse, we now have even more farmers producing even more coffee that the world doesn't want instead of learning to produce something that the world does want. Finally, how much "more" must the purchasers pay? Market prices are set by supply and demand, but who decides what price is "fair," and by what standard?

Have the government pay more to make up the "difference." This is basically the same thing as making the purchasers pay more, except that the "more" comes from a broad tax-base instead of the actual consumers of coffee.

Have the government pay growers NOT to grow coffee. No, I'm not joking, paying farmers NOT to work is a time-honored tradition. We solve the glut problem and prop the market price, but the cost of the subsidy is still a drag. More importantly, instead of paying coffee growers to grow useless coffee, we're now skipping the middle man and simply paying them to be useless. This might be a good stop-gap, but economies can't stand long with large portions of the economy being dead weight. Eventually we'd want to wean the farmers off of the dole, a trickier process said than done. Agricultural lobbies in industrialized countries have shown themselves to be incredibly tenacious in defending subsidies, so Latin American governments would be wise to proceed with caution here.

Count on responsible consumers to pay more out of the kindness of their hearts. This is the Free Trade premise: instead of paying $X for coffee, pay $X for cofee + $Y for guilt-removal. It's an interesting gambit, and it might even work if the proponents got the market right. What do I mean by "getting the market right?" Well, the Free Traders seem convinced that Starbucks sells coffee. This is a conception that, while certainly valid, misses the point. It's like saying that an artist sells canvases and ink. Starbucks isn't making money by importing coffee from Brazil, marking it up X%, then selling it to sheeple. If they were, a competitor would come along, import the same coffee, and sell it for X-Y%. Starbucks differentiates by adding value, most obviously by brewing the stuff for you, but also by providing a consistent product line that's available wherever you go, offering pleasant facilities, opportunities for socializing, and whatever else. If your coffee chain got those things more or less right and made up for the any deficits by differentiating on social policy you'd might be able to stay afloat. Basically "feel-good" doesn't cost you anything in terms of overhead, so you can pass whatever market advantages you get from it on to the farmers. All that said, the effect is going to be pretty small. You're counting on good will, Starbucks is counting on contemporary decor and the pull of the familiar...

Help Starbucks help you. Nope, not kidding here either. Starbucks is popular, prevalent and well-marketed -- a combination that boosts overall demand for coffee. Higher demand leads to higher price, which leads to happier farmers. The effect probably isn't big enough to erase the long-term need for coffee growers to innovate, differentiate, or get out of the market, but it might help a bit in the short term.

So, what's a socially-minded, coffee-drinking consumer to do? Quit focusing on keeping farmers afloat in a dead-end career and do what you can do to help them become more productive. Take out a micro-loan. Support educational visas so that developing countries can send more folks abroad to train and then bring the skills they learned back to their local economies. Do what you can to oppose for the War On Drugs, which leads to violence and corruption in producing countries, threatening the stability and rule of law necessary for economic growth. Don't vote for politicians who advocate protectionist policies since the bubbles they create will eventually burst, making an immediate disaster out of what should have been a gradual adjustment. It might be a lame sound bite, but it's the only way I know how to close: The only fair trade is free trade.

Soul of Wit was too pretentious and Recreational Belligerence was too accurate -- it made me want to be belligerent. I'm just sayin'... seems a little more neutral. If anything, I like it for its lack of seriousness... =)